1. How Do You Get Credibility? Before making that first sale, before winning that first cash infusion, even before putting a product into production or hiring employees to perform a service, most start-ups struggle to establish credibility. Suppliers, customers, and investors all need a little coaxing to trust an unproven entity. The job is even tougher when you're 22 years old, with no experience in your chosen market.

That was the problem Don Winter faced in 1988, along with partners Michael Travin and Larry Gelfand. They had invested a total of $1,000 of their own money in Resident Publishing (#207). Their plan was to start a controlled-circulation community newspaper for New York's tony Upper East Side. Half their cash went for a mock-up of the tabloid, which they would use to sell area retailers on the idea of prebuying advertising.

But when the mock-up arrived, it wasn't what they had envisioned. "It was pitiful," Winter says. "Four pages. The logo was childish. Showing it on a sales call would have been a blow, not an asset." So now, not only were the founders young and inexperienced, but they also had no sample product with which to augment their sales pitch.

Even if the retailers did chance an ad, it would be only at the 30- or 60-day terms typical for a start-up business. And that would not give the partners the cash they needed to get the paper started. With so many strikes against their credibility, they decided the only way they'd walk out of a sales call with cash was to appear to represent a fat, happy company run by smooth professionals.

"At age 22, when you say, 'This is a tremendous product,' there's a confidence and credibility problem," Winter says. "Instead, we created the illusion that we were part of a larger group, not just three guys out there selling. We couldn't have carried it off if we'd said, 'Hey, we're the owners.'

"First, we spent months conceptualizing so there'd be no vascillating during sales calls," he says. The partners ended up with a typed list of their proposed publication's six "points of excellence," which included strengths such as community focus and cost effectiveness.

So they'd look like three cogs in a reassuringly larger machine, their business cards read "account executive." Prospective customers who asked, "Who are you?" were told, "We're the sales reps." Which, Winter insists, they were. They also just happened to be the owners. "If anyone had asked if we were the owners, we'd have said yes. But we came across as sales reps, and we had such an ambitious idea that we gave the impression it was a big company."

Their tactic worked. Within three months they'd sold more than $15,000 in advertising for the first issue, over half of which was in cash, and 80% of the buyers had committed to three more issues. Then they put on the same act to get favorable terms for the $4,000 print run. "We went to 10 or 12 printers," Travin recalls. "The one stipulation we had was that we needed credit terms." They got 30 days from one printer, who assumed they were a bigger operation. Resident Publishing has been running on cash flow ever since.

Three months after the first issue came out, the monthly became a biweekly, and after a year the owners added a paper for the Upper West Side. It was followed in subsequent years by papers for the Midtown and Downtown areas. Making the first few Upper East Side deliveries themselves to area residential buildings, the owners had chatted up doormen and concierges. "We told them we were the distribution managers," Travin says, and notes that the trio, dressed in jeans or shorts, had left plain company business cards behind.

Winter, Travin, and Gelfand finally came clean at a community meeting. Two years into the business, Resident Publishing was asked to cosponsor a local safety seminar. "We felt the time had come," says Winter. "We needed to be more than salespeople and to use the paper as a real vehicle to enhance the community." When they stepped up to the podium as the owners, Winter says, "the people we'd sold to early on were amazed." But fortunately, they weren't angry. "One person said it was nice to know that the same people who were working so hard could actually take home a piece of the company."

Establishing credibility is a critical issue for any start-up, says Travin. "If you go to a retailer and sell them, they'll go tell their neighbor. You get word of mouth. If it's good, you're in business. If it's bad, you might as well close your doors."

Winter agrees. "In New York people are so skeptical. Businesses come and go, so people are looking for credibility. We never said we were backed by someone larger; we just gave that impression. And we're proud of it. Three people created the illusion of being a big, strong company." Now, six years later, Resident Publishing is finally just that. -- Phaedra Hise

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2. Can You Really Do It All from Home? Zoning laws and space limitations notwithstanding, starting a business from home is a cheap and convenient route many entrepreneurs take. Carve out household space for the desk, the files, an oven, some baking sheets . . . That's what the Hopmayers, founders of Original American Scones (#331), did in 1986. Jeffrey Hopmayer was 22 when his parents started baking scones in the basement of their home, in Wilmette, Ill., for Chicago-area grocery and department stores. They hired Jeffrey to help bake and to learn the business. After he became president, in 1988, he grew Original American Scones to a $93-million company with national distribution.

Starting a manufacturing operation at home didn't require much remodeling of the basement rec room. The family turned its various games into work surfaces. Jeffrey Hopmayer unscrewed the foosball players' heads and put 3/4-inch plywood on both the game board and the pool table for rolling out the dough. He slapped another sheet of plywood on the pinball machine to make a desk. "At lunch break we'd lift off the plywood and play," he says. The Hopmayers bought a commercial freezer, which they had to take apart in order to squeeze it through the basement door. They washed the pans in the laundry-room sink.

The dough was mixed in a few household-size Kitchen Aid mixers. "We were measuring out the flour on diet scales upstairs in the kitchen," Jeffrey Hopmayer says. "The scales were so small we had to do one-third of a batch at a time and mix it all together at the end." The small industrial oven they'd set up in the basement could hold only four sheet pans at once, with 18 to 24 scones per pan, and it and the freezer required a little extra wiring. "The stuff we bought was wired for a 220 outlet," Hopmayer says. "The only 220 outlet was the one for the dryer." Forty feet of two-inch-thick black cord running across the floor to the fuse box solved the problem. "When we wheeled the ingredient carts around, we had to lift them over the cords."

Hopmayer hired half a dozen neighborhood kids, who rode their bikes to work each day, to help with the baking. "We were all down there making scones. They tracked their own time, and we paid them with personal checks." To break the monotony of pressing the round cutters into sheets of frozen dough, the bakers indulged in flour fights. The basement had no vents, so on hot days, with the oven cranking away, the kids would take a pool break.

Hopmayer picked up the raw ingredients in his Datsun 200SX. "One day the rear axle fell off when I was going over a railroad track," he says. "The guys at the flour place had told me the car wouldn't hold 1,500 pounds of flour, but I'd said, 'No, fill it up.' "

When semis carrying supplies started blocking the street in suburban Wilmette, the neighbors took notice. "Eighteen-wheelers didn't come down the street there unless somebody was moving," says Hopmayer. "And we were blocking the street for three to four hours, unloading pallets."

The neighbors complained about the trucks, and soon the health board paid a few visits. "The zoning laws said we could run a business out of the house," Hopmayer says. "But we couldn't employ more than the number of people who lived in the house." When the officials knocked on the front door, Hopmayer would shoo his workforce out the back to play basketball. "The guy would say, 'You can't have a business here,' and I'd say, 'It's OK, I'm the only one here." The board would write a few citations, reprimanding Hopmayer for having, say, wooden walls. Then Hopmayer would run out and buy some Formica to nail up, and be back in business. The board eventually wised up to the basketball ploy, however, and told him to start looking for a commercial spot.

By that time Hopmayer had pretty much decided that his location was a liability. Sure, his only big expenses were ingredients and gas for deliveries. But he was too far away from downtown clients such as Neiman Marcus, which had a standing order for three dozen scones a day. "Making 36 pieces and driving 45 minutes to deliver them downtown was silly, and we did it every day.

"To make the business less of a hobby, we needed larger equipment and a larger customer base," he continues. "And eventually we would've been kicked out by the health department." Hopmayer also wanted a separate location to make the company more professional. "Lots of people have home offices, but a manufacturing company is different. It's hard to have it in the basement and feel like it's a real business."

The company relocated to a failed brownie shop in downtown Chicago. Shortly afterward, a representative from a fledgling coffee chain called Starbucks tasted one of the scones and signed Original American Scones as one of its suppliers from Chicago. Similar strategic partnerships with Marriott, Sara Lee, and Quaker Oats shot the company from the hobby stage to the real-business stage. The venerable basement oven still holds court in the bakery, and is now used to test recipes. The same health inspector now helps Hopmayer scout out new bakery locations. And Hopmayer himself remains in the kitchen, where he's currently developing low-fat products. "I still like to be in the dough." -- Phaedra Hise

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3. How Much Planning Is Enough? Sometimes business ideas arrive like a bolt from the blue. An entrepreneur-to-be may be walking down the street one day, bored with his gray-flannel life, humming, "Is That All There Is?" when he trips over a cat, and inspiration strikes. "Cats should be on leashes," he thinks, "and I am the man to make it happen!" Six years and 6 million leashes later, he hits the Inc. 500. Others pursue entrepreneurship more matter-of-factly. They research markets, analyze trends, and after much deliberation settle on the best bet.

Harold Finch, CEO of CottageCare (#167), in Overland Park, Kans., has done it both ways. He first made the Inc. 500 in 1983, with a management-training company, Padgett-Thompson, which was born of his frustration with existing options. In 1985 Finch sold Padgett-Thompson to H&R Block. He was 52 and ready, he thought, for an early retirement. "But business was in my blood, and I had to get back to it."

The sale gave him the money and the time to research his next venture. Research had always come naturally to Finch. In 1971 he had completed a doctoral dissertation on changes in the labor force, and early in his career he had been a project director at Midwest Research on the NASA/Apollo project -- that's right, a rocket scientist. "The discipline you need as a scientist to track data and make decisions based on it is very useful in business, very transferable," he says.

Finch spent six months at the library studying broad economic trends and identified three he thought were key to the success of his next business: the rise of service, of franchising, and of the working woman. He figured if a business took advantage of those trends, it stood a fair chance of sustaining growth. So he began to consider fast food, child care, and housecleaning. That's when his next partner approached him.

Tom Schrader had started a housecleaning company 17 years earlier in Lincoln, Nebr., for which he had experimented with new ways to price and clean customers' homes. Schrader had wanted to franchise his business, but he had underestimated the capital requirements and had to sell his company to cover debts. Eager to start over, but chastened (and broke), he approached Finch, looking for marketing know-how and capital.

Both men had come to the right place at the right time. "Tom allowed me to shortcut my industry research," Finch says. "He's a walking textbook on housecleaning." CottageCare was born.

Its start-up phase was utterly unlike that of Finch's first business, Padgett-Thompson. Then, he was a new manager on the NASA/Apollo project, having just been promoted from researcher. "I had years of training as a scientist, but not one minute's training as a manager. When I asked how to do it, I was told, 'Just do it.' And I made every mistake in the book." Finch shared his frustration with a friend in the same situation; they looked at the available management-training programs and saw a big opportunity. Soon after, they quit their jobs to start their own training company. "We had no plan," Finch recalls. "We went in blind."

After some nerve-racking months, with Finch and his partner buying food on credit for their families, the venture began to take off. "We started with one seminar in Chicago. We needed six attendees to break even," says Finch. "Well, we got six. But two businessmen from Iowa got lost in Chicago, and they hadn't paid in advance. So instead of having dinner and getting a motel overnight, we drove home and ate apples. But that taught us who would and wouldn't come, and we just kept increasing what worked and decreasing what didn't." Within five years Padgett-Thompson had grown to $7.6 million in sales. By 1985 sales had reached $30 million.

Despite his success, Finch doesn't recommend starting off with such heedlessness. "I'm more a planning person than an inspiration person," he says. And the next time around, with CottageCare, he and his partner planned carefully. After the broad market research, they concentrated on finding new efficiencies in the industry. But Finch credits the success of CottageCare to innovations in marketing and sales that allow managers to focus on customer service.

Typically, housecleaning businesses advertise with doorknob hangers or flyers distributed by kids, whom managers have to supervise. CottageCare handles marketing at the corporate level, and uses direct mail. The approach gives managers more time to inspect sites and to talk to customers, and it keeps down customer turnover.

The sales operation is centralized as well. When prospective customers call the CottageCare franchise in, say, Seattle or Houston or Minneapolis, their local call is automatically patched through to the corporate sales offices, in Overland Park. There, telemarketers price a house over the phone, from perhaps hundreds of miles away. Most housecleaning companies send a manager to the house with a tape measure. CottageCare's staff can estimate the size of the house based on clues from the customer and zip-code information about the neighborhood retrieved from the company's database. That too frees up managers to concentrate on quality.

Finch still goes to a hotel room at least once a month, with nothing but a pad and pencil, to think up ways to do his work more effectively. But he recognizes the practical limits of research. "At some point you have to stop reading, stop talking, stop studying, and do it." If his first start-up hadn't taught him that, he says, he might still be sitting in the library. -- Michael P. Cronin

4. How Much Experience in the Industry Do You Need? "Since I was a little kid, I've always had something going -- shining shoes, washing cars," says Natalie Stiles, CEO of OCS Consulting Services (#238), in Orlando. "And I always wanted to own a business." But Stiles postponed that dream after college, and instead became a systems consultant to corporate giants. When she finally grew frustrated enough to rededicate herself to entrepreneurship, she stuck with what she knew. After 20 years of industry experience, she had a pretty good idea of what to do -- and what not to do.

Right out of school, Stiles went to work for Litton Industries as the company's first woman programmer. She hopped to Xerox, then to General Electric's Consulting Services division, or G-Con. She worked there from 1983 to 1989, first as a consultant and then as a technical director, managing consultants. At one point during those years, Stiles left for a competitor who had offered her a sales and marketing position, something G-Con had refused her. G-Con lured her back with a similar position, but the sclerotic corporate culture frustrated her -- "It took days to make decisions" -- and she felt stymied in her career. "There was no room at the top for mavericks. You were supposed to do what you were told and make your numbers."

Stiles learned a lot of positive lessons at G-Con. When she'd returned to take the sales and marketing position, the company had put her through more than a month of intensive training in strategic selling -- how to identify decision makers in a client company, how to call them, how to analyze the account, and how to develop a marketing plan. She passes that knowledge on to her own salespeople. "I have to teach them that selling is more than getting an order. It's developing a relationship."

She learned negative lessons, too. In many ways Stiles's memories of G-Con provide a model of what her company won't be. She'll never get so caught up in the numbers game that she forgets the people. Because she was a consultant herself, Stiles says, "I know what it's like to sit in a city 200 miles away from headquarters, and no one calls you." She keeps in touch with her workers by hosting lunches and deep-sea-fishing trips, and by treating each consultant's problem as her own biggest problem. "Customers always hear about problems first -- if the consultants don't think we're paying enough or answering their questions fast enough, they'll tell the customers, and the customers will tell us. When that happens, it's bad news."

And she'll never get so caught up in the numbers game that she'll pass up business. G-Con, she says, always quoted the standard markup on a consultant's services. She's more flexible. OCS will accept a slimmer margin to start a promising relationship. Of course, Stiles's clients are mostly Fortune 100 companies, so there is some room to maneuver. Nor will she seek false economies. "There were a lot of cash constraints at GE," she recalls. "I didn't have a fax machine there because our office was trying to save money. Now I'll invest money where I think it's going to bring a return."

All in all, it was quite an education. Did it have to take so long? Stiles admits she probably should have gone her own way after leaving GE the first time, instead of returning for another year. "Someone approached me then -- a prospective partner -- but I wasn't ready." Could she have learned all those lessons at her own company, the school of hard knocks? "It would have taken longer," she says. "I can see problems coming, I can put out fires before they start." Five years, 40 employees, and $2.4 million into her dream, one of Stiles's biggest clients is GE itself; the consulting division that served as her classroom was sold nearly two years ago. -- Michael P. Cronin

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5. What If Somebody Steals Your Idea? American Harvest (#150) sold a respectable $72 million worth of food dehydrators, high-speed baking ovens, and accessories last year. But in 1975 the company, then known as Alternative Pioneering Systems, was just a glimmer in the eyes of founders David Dornbush and Chad Erickson, and they were worried that someone might knock off their idea to mass merchandise food dehydrators. "We took the blind leap," says Erickson, who also took plenty of precautions when rolling out the idea.

No wonder. They themselves had knocked off their food-dehydrator design from a manufacturer who had been touting the virtues of his gadget on a local afternoon talk show that Dornbush, a very bored business-school graduate student at the time, had watched.

But it wasn't even the ease with which the machine could be duplicated that scared the two founders most. The linchpin of their business plan was to mass market the obscure gadget, found in survivalist stores. And as anyone in a service business knows, protecting a potentially lucrative marketing concept requires shrewd talking.

"We wanted to sell food dehydrators to mainstream American home gardeners interested in preserving their fruits and vegetables," says Erickson. And that's the type of idea people with money and contacts would have loved to call their own and make happen. "We were pretty paranoid about everybody," he confesses.

Dornbush and Erickson figured that the best way to protect their idea was to first build a prototype that would outperform the existing competition, which they did, with the help of a trusted friend who was studying aerospace engineering. "We got into the patent business right away," says Erickson.

Armed with their patent-pending prototype in one hand and a thoroughgoing market-research survey in the other (a paper Dornbush had written for a marketing class), they told all to potential manufacturers' representatives with contacts at major-department-store chains. "We had built quite a bit of equity in our idea by the time we contacted potential sales representatives, so it would have been fairly difficult for them to take it over," says Erickson. "We weren't shy about saying we had patents pending."

The manufacturers' reps shared equally detailed information with Dornbush and Erickson, helping to bring their business idea one step closer to reality. They told the young duo what the price to, say, Sears would have to be for the retailer to sell the unit for $99, what their commission structure was, and what margins small-appliance manufacturers worked with.

And when he was price shopping for components, Erickson reports, he didn't care if vendors knew he was building a food dehydrator, but there was no way he was going to disclose the company's mass-marketing plan. By 1977 Erickson and Dornbush had refined their prototype so the dehydrator could be mass-produced at the desired price point. And thanks to the recommendation of a vendor, they had lined up a manufacturer to fill the orders.

A manufacturer's representative with ties to major catalog companies agreed to take on their product and opened doors that got their FD-200 model on the inside cover of the 1978 Montgomery Ward catalog, as well as in the Sears and J.C. Penney catalogs, among others.

By the summer of 1978, the gush of orders was overwhelming the manufacturer, which had decided to cut the sales projections given to it in half. Worse still, the manufacturer changed the contracted price, jacking it up $5 a unit midway through the summer selling season. (The shop had become unionized and subsequently labor costs had risen.) To compound matters, entire truckloads of bad products were being returned to the manufacturer, as the defect rate approached 26%. Dornbush and Erickson's Alternative Pioneering Systems was in danger of going under.

"We decided to focus on one account and delay shipment to the rest," says Erickson. (They chose Sears.)

Then, at a January 1979 home show, Erickson discovered the first knockoff of the FD-200, made by a company called Excalibur. "When I saw it," he says, "I had an overwhelming urge to break pencils." Without the funds to hire a cadre of patent lawyers to close down Excalibur, Erickson realized that the only way he could really defend his product would be through technological innovation and sales. "I concluded that no matter how good our patents were and no matter what we told people, there would always be someone trying to knock us off," he says.

Excalibur went in and cleaned house, snatching four of Alternative Pioneering Systems' five catalog accounts. After two years of minding their p's and q's, the cofounders' worst fear had come true. "Our own problems allowed them to come in and steal our business," admits Erickson, who could afford only to send nasty letters to defend his patents. The two estimate they lost $6 million worth of business because of the manufacturing debacle.

Amazingly, their company survived. Erickson came out with a revolutionary round design. And when the gardening market took a nosedive so severe that for the first time in 100 years Sears pulled canning equipment from its catalog, Erickson and Dornbush repositioned their product for the snack market and squeaked by. They also found a white knight, who gave Alternative Pioneering Systems an infusion of working capital in exchange for an equity position. (Excalibur, meanwhile, was #85 on the 1983 Inc. 500 list and in Chapter 11 in 1985.)

After a few tough years, Dornbush, now CEO, and Erickson, chairman of the board and executive vice-president of research and development, finally regained the precious catalog accounts and repurchased the stock from the investor. These days American Harvest's products are knocked off all the time by copycats in the Pacific Rim. "That just makes our salespeople sharper," says Erickson.

-- Teri Lammers Prior

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6. Where Do You Go for Capital? How much is half of nothing worth?

A smirk? A hundred thousand dollars? Something in between?

Few tasks are more enigmatic when raising money for a new business than figuring out how to value this thing that is little more than a plan and a promise.

Patrick Lammert and Mark Weber were 25-year-old expatriates of several color-separation houses -- places that do a key part of print production for publishers and catalog companies -- when they decided to start their own color-separation business, Wisconsin Technicolor (#117). But like a lot of young, green, and naÃ¯ve entrepreneurs, they were shocked -- shocked! -- to discover that all three banks they approached for a loan were heartless enough to demand collateral. And though they'd scraped together $50,000 of family money, they needed another $50,000 to lease equipment, buy office furniture, and cover payroll for a couple of months.

They were lucky, though: Lammert and Weber found a private investor -- the son of a friend of Weber's grandmother, a guy who also was in the print business -- who was willing to front them the $50,000. The terms, however, were more than most entrepreneurs would be able to stomach: 51% of the business in return.

Fifty-one percent? Were they nuts? There's desperate and there's desperate, and giving away a controlling interest when you're starting your own company could make it seem as if, well, you were starting someone else's. The Inc. crowd, after all, tends to be an obsessively independent bunch, with the average Inc. 500 CEO owning 59% of the business, and about a quarter of all Inc. 500 CEOs owning 100%.

But there was a caveat for Lammert and Weber, and a good one: both they and their investor were keen on arranging a mandatory buyback of equity. And sure enough, this past summer, five years into the business, the two founders paid out nearly 9% of the previous year's $3.2 million in revenues and became 100% owners of their company for the first time.

"Obviously, that had been our dream, to be partners and co-owners in this business," says Lammert. "But that arrangement was an excellent way to make that happen."

The structure of the arrangement had a couple of tiers. The pair's investor, Jack Schumann, was willing to help fund the start-up stage of Wisconsin Technicolor, but only if he had a controlling interest in the first years. He would hand over $50,000 for 51% ownership and be a partner in the big decisions. He would also be a consultant on various issues, from how to run a credit check to how to budget; for that Lammert and Weber would pay him 5% of gross sales each month. Schumann agreed to send over the color-separation business of his own company, Schumann Printers, now a $25-million operation in Fall River, Wis., for at least one year. (At first, his work accounted for 95% of Wisconsin Technicolor's business; now it's 3%.) And at the end of five years, he would sell back his equity.

Not that both sides didn't have their qualms. For one thing, Pewaukee, Wis., where Wisconsin Technicolor is based, is a national center for the print business. At the time Lammert and Weber were starting up, there already were some 75 separation houses tripping over one another for work. That made Schumann queasy, as did his initial reaction to Lammert and Weber themselves.

"I was turned off," he concedes. Lammert and Weber had made their first appointment with him under the amorphous guise of "discussing business," and for the first five hours of a six-hour meeting, Schumann thought they were soliciting his business. Once they got around to asking him for the cash to start the venture about which they'd just rhapsodized so voluminously, they'd already created an impression -- and not a stellar one. They seemed cocky, not the sort he wanted working for him. But their self-assurance also reminded him of himself when he was starting out, and that proved irresistible.

"I think it was a real good benefit for us," says Lammert about hooking up with Schumann. "When things were going well, and the company was starting to make some money, he helped us keep our feet firmly on the ground. We very aggressively go out and seek new business, and try to be profitable and design good work flows for our clients, and I guess I attribute a lot of that to Jack." As for Schumann himself, his $50,000 investment turned into $280,000 in five years -- a 460% total increase, or a 41% compound annual growth rate. -- Leslie Brokaw

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Research assistance provided by Kevin McDevitt.

1994 INC. 500 FOUNDERS' SURVEY

The idea for the company came from:

In-depth understanding of the industry/profession 37%

Market niche spotted 36%

Brainstorming 7%

Copying someone else 4%

Hobby 4%

Other 11%

(May not add up to 100% because of rounding)

It took this long to start the company, from the original idea to the beginning of operations:

A matter of weeks 21%

A few months 32%

Six months to a year 26%

More than a year 20%

(May not add up to 100% because of rounding)

Here's who helped develop the idea for the company and helped turn it into a business: